The Advisor's Notebook
The Three Questions I Ask Before Recommending Any Fund
Every fund recommendation could be justified with a factsheet — good returns, reasonable expense ratio, a track record that looks fine on paper. That's the easy part, and it's also the part that misses almost everything that actually determines whether a recommendation turns out to be right. Before any fund goes into a client's plan, I ask myself three questions, and none of them are on the factsheet.
Every holding in a portfolio should be able to answer a simple question: why is this here, specifically? Not "it's a good fund," but "it's here for this goal, playing this role, expected to behave this way relative to everything else in the portfolio." If I can't cleanly answer why a specific fund is in a specific portfolio — if the honest answer is closer to "it's been doing fine" than "it's doing a defined job" — that's usually a sign the recommendation was driven by performance-chasing rather than a plan. A portfolio built entirely out of individually good funds, with no clear reason each one is there, isn't a strategy. It's a collection.
This is the question that filters out recommendations built on a good recent run and nothing else. Any fund can look brilliant after eighteen months of strong performance — that tells you almost nothing about whether it was a sound recommendation in the first place. The test I actually use: if this specific fund underperforms its category for the next three years, can I explain, honestly and specifically, why it was still the right call at the time I recommended it? If the only available explanation would be "it had done well recently," that's not a reason that survives the test — and if it doesn't survive the test in my own head before the recommendation, it shouldn't survive into a client's portfolio either.
It's genuinely easy to make a portfolio look sophisticated — more funds, more categories, more "diversification" that on closer inspection just means more overlapping large-cap exposure spread across more paperwork. Complexity that doesn't demonstrably improve the outcome isn't sophistication; it's noise that makes a portfolio harder to actually understand, harder to review, and harder to stay disciplined about when markets get uncomfortable. The best portfolios I've seen are rarely the most elaborate ones. They're the ones where every single holding has a clear, defensible reason to exist, and nothing is there just because it seemed reasonable to add.
None of these three questions show up in a performance table, and none of them can be answered by a factsheet alone. They're the actual filter — the difference between a fund that looks good and a fund that's genuinely right for a specific person's plan is almost never visible in the numbers alone. It's visible in whether someone actually asked these questions before making the call.
Atin Kumar Agrawal, Abundance Financial Services (ARN-251838), is an AMFI Registered Mutual Funds & SIF Distributor. Book a free consultation if you'd like your own portfolio run through these same three questions.